Q2 Outlook: Get Ready for the Spring Selloff

[1]If this year is anything like the last three years, get ready for the market to stumble — or even hit a full-blown correction — at some point in the second quarter.

Of course, it’s not a foregone conclusion. The U.S. economy certainly looks to be in better shape this time around. The job market is getting better, as hiring is picking up and the unemployment rate is slowly trending down.

That’s partly due to an accelerating housing market, including large increases in housing permits, new construction, better sales of existing homes and rising prices.

But Cyprus is throwing the eurozone into crisis once more, there are still recessionary conditions across much of Europe and China continues to suffer an ongoing slowdown. With these all weighing on global growth and investors’ psyches … well … it could be déjà vu all over again when it comes to a spring and summer market swoon.

Forget about “Sell in May and Go Away.” Since 2010, it’s been best to get out of the stock market at the beginning of the second quarter.

Have a look at this three-year chart of the S&P 500, courtesy of S&P Capital IQ, and you’ll see that things always seem to fall apart right about now:

[2]

As Jurrien Timmer, co-manager of the Fidelity Global Strategies Fund (MUTF:FDYSX[3]) notes in some recent commentary[4]:

“In 2010 it was the end of QE1 and the beginning of the eurozone debt crisis that led to a 17% correction in the S&P 500 from the April high to the July low (based on intraday extremes).

In 2011 it started as an inflation shock (in terms of food and energy prices) caused by the combination of QE2 and an overheating China, which was ultimately compounded by the debt ceiling fiasco, policy tightening in China, and a further unraveling of the debt crisis in Europe. The market peaked in May and fell 21% until it bottomed in early October.

In 2012 it was the growth recession in China combined with yet another flareup in Europe, this time brought on by the Greek elections. The S&P 500 peaked in April and fell 11% to its low in June.”

Now, everyone is saying that the four most dangerous words in investing are “This time it’s different.” Still, there are a bunch of fundamental differences this year — as we mentioned briefly — that support more upside for stocks in the second quarter.

Among a long list of good news for the bulls, Liz Ann Sonders, chief investment strategist at Charles Schwab (NYSE:SCHW[5]), notes the following market tailwinds:

Many economists are upping first-­quarter real gross domestic product estimates; some as high as 3%.

Housing is firing on nearly all cylinders.

Unemployment claims (a fellow leading indicator with the stock market) are at a five-­year low.

Household net worth is on track to take out its prior all­-time high this quarter.

Industrial production and retail sales have been particularly strong (primary source of higher GDP forecasts for first quarter).

Small business confidence is ticking up.

Earnings revisions are turning higher.

There have been moderate, but persistent employment gains.

There has been the highest year-­to-­date stock mutual fund inflows in seven years.

About 90% of S&P 500 stocks are above their 200­-day moving averages.

Fortunately, whatever the market does in the second-quarter, it’s pretty easy to prepare for it.

If you’re a tactical investor who doesn’t mind racking up trading fees and capital gains taxes, just tighten up those stop-loss orders — and don’t be afraid of getting stopped out.

If you’re a long-term investor? Relax. If you’re dollar-cost averaging into equities — like through a 401(k) plan — well, a market swoon just means you’ll be buying good stocks at ever-cheaper prices.

Don’t forget: We had serious corrections in each of the last three years — and they were all followed by powerful rallies into year-end and beyond.

As of this writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.